Challenge of diversification of Algeria’s economy

Fix the current political industrial policies . . .

At the dawn of the 4th industrial revolution where Information and Communication Technologies (ICT) with Algeria having had a very mixed 2016 ranking, some officials seem to be still living in the utopia of the era of raw materials and the mechanical era of the 1970s that are no more development elements of the twenty-first century; the world preparing for the forthcoming industrial revolution based on the knowledge economy and environmental challenges of ecological industries. It should be time to face up to the Challenge of diversification of Algeria’s economy.

The purpose of this contribution is to review from 2013 to June 2016, the share of non-hydrocarbon within the trade balance exports and analyse the potentialities of the Challenge of diversification of Algeria’s economy .

1 – Year 2013

– Food products $323 million or 11.5% of which sugar are $228 and dates $38 million.

– Raw products 3.91% with $110 million of which phosphate $96 million, waste paper $6.61 million

– Semi-finished products 83.6% amounting to $2,350 million including naphtha solvents for $1,105, ammonia for $610 and $312 million for fertilizer rebus (paradox according to official statistics, Algerian farmers use little fertilizer because of its price)

– Industrial equipment 0.53%

– Non-Food consumables 0.36%.

2 – Year 2014

The overall results obtained on the achievements of the external trade of Algeria for the period from the year 2014 highlight a trade surplus of $4.63 billion, a decrease of 53.49% recorded in the year 2013. This trend is simultaneously explained by a rise in imports and a decline in exports. In terms of coverage of imports by exports, the results in question, give 108% in 2014 against 118% in 2013. As far as the non-hydrocarbon exports structure, these as always were still dominated by derivatives of hydrocarbons and ferrous / non-ferrous waste, and except for the sugars amount to $2,582 billion. The break-down is as flows:

– Food products 0,62%

– Energy et lubricants 94,54%

– Raw products 0,28%

– Semi finished products 4,48%

– Industrial equipment 0, 05%

– Non-Food consumables 0,03%

Hydrocarbon derivatives of which oils represent $988 million thus 36.35%, Ammonia $568 million or 21.29%, $ 292 million and fertilizer or 11.33% and Hydrogen gas $47 million or 1.82% with a total of 71.79%.

3 – Year 2015

Recession was 39.91% as related to 2014 according to the local Centre of Statistics (CNIS). The overall results of Algeria’s external trade for year 2015 show a trade deficit of $13.71 billion against a surplus of $4.31 billion during year 2014. In terms of coverage of imports by exports, the results in question, are 73% in 2015 as opposed to 107% in 2014.

The break-down is thus :

– Food products 0,62%

– Energy and lubricants 94,54%

– Raw products 0,28%

– Semi-finished products 4,48%

– Industrial equipment 0, 05%

-Non food consumables 0,03%

For non-hydrocarbon exports, these being marginal but still dominant by derivatives of hydrocarbons and ferrous /-semi-ferrous waste, except sugars. Oils represent $588 million or 37.34%, ammonia $502 million 24.35%, fertilizers $439 million or 21.27%, Hydrogen gas $25 million or 1.21%, for a total of 84.17%.

4 – The first six months by 2016

This trend is of the four first months of 2016 that was recently confirmed by Customs statistics as reported by the official news agency APS on July 20, 2016. The trade deficit of Algeria reached $10.83 billion in H1 2016 as compared with a deficit of $8.51 billion in the same period in 2015; an increase of the deficit by 27.2%. Exports fell significantly to $12.68 billion during the first six months of 2016 against $18.93 billion over the same period of 2015 (-33,02%), i.e. a decline of $6.25 billion and the rate of coverage of imports by exports rose by 54% versus 69% between the periods of comparison. Hydrocarbons continue to represent the majority of Algerian sales abroad up to 93.55% of the overall volume of exports, with a $11.86 billion in the first six months, against $17,868 billion at the same period in 2015 (-33,62%), representing a decrease of $6 billion. Non-hydrocarbon exports, which accounted for 6.45% of the total exports volume, decreased to $818 million, down 22.83% as compared to the first six months of 2015. We could therefore say have a similar structure of the previous years in non-hydrocarbon exports.

– Semi-products with $624 million ($846 million in 2015)

– Food products with $129 million ($150 million in 2015)

– Raw products with $34 million ($50 million in 2015)

– Industrial equipment with $22 million ($8 million in 2015)

– Non food consumables $9 million ($6 million en 2015).

5 – A meeting scheduled for December 2016 between Algeria and Africa

This is to discuss all trade outside oil (1). However, in the structure of Algerian exports, hydrocarbons continue to represent the majority of sales abroad. By 2015, these represented 94.54% of the overall volume of exports. For the first six months of 2016 at 93,55%, we have a small improvement in percentage but a significant decrease in overall value. If all derivatives of hydrocarbons were included, we will have over 97%. The question is therefore : what products will Algeria export?

The dynamization of the sectors outside of those related to the rentier economy in the period of 2017 and 2020, within the values and to international standards, (cost/quality), will depend on the structural reforms extents and depths of applications.

This will be conditioned by public and private businesses innovating as based on R & D and new technologies to be competitive. The private sector currently contributes for less than 2% because of the numerous constraints involved in the entries of foreign currency. According to the 2015 report of the Ministry of Energy, published in June 2016, and with the oil price averages that fell from $99,41 of 2014 to $52,13 in 2015, the turnover of SONATRACH was $33.19 billion in 2015 against $58,45 in 2014, i.e. a contraction of 43%. We must however be aware of the T/O indicator is an indicator that is imperfect and insignificant factor to take account of.

To find SONATRACH’s profit, 20 up to 25% must be deducted as total costs and this rate is variable for any other businesses. For some SMBs, costs are higher than turnover and there arises in the Return on the Investment because of this myth of the generalization of the 49 / 51% rule. These protect certain interests under a guise of nationalism, and have had since 2009 a very mixed impact, unlike the speech of the Minister of Industry. As in his last speech proposing to lower by $30 billion import through the cement, phosphate etc. However, no country in the world developed its economy through raw materials exports. So let us avoid the myth that exports of phosphate, cement or other low value-added products would be one of the solutions.

For the phosphates, the recent contracts of $4.5 billion with the Indonesians terms were not clearly explained by the Ministry of Industry, even though with 10 million tonnes of exports against the one million, and the price fluctuating in 2016 between $115/125 per metric ton and being function of the contents, sales from this exports will approximate $1.2 billion. As costs in this sector are generally high at over 40% minimum, the net profit will be about $720 million a year before accounting for the 49% share of the Indonesians. Fertilizers processing is more profitable but here will be the problem of the price of natural gas; SONATRACH having had serious disputes with other concerns for not wanting to align on the domestic market sale price of gas.

This would be a significant loss for Algeria, which besides any price dumping being prohibited for international trade. As far as cement exports, it has not only high transport costs but it is almost impossible to export it to Europe and Asia alike, but not less so to America. For Africa, many international groups have already settled for some time and therefore, to opt for that market would be only through joining an international group.

For cars, trucks and any small automotive vehicles with high costs, for the majority of local assembly, intended for the local market, with an integration rate that does not exceed 15% (subcontracting is very low), the international standards for cars are at least 100.000/150.000 units per year. If they were to be carried out, this will inflate the topic of imported components, to draw up the balance currency between the decrease of imports and the increase in this topic. One wonders where could the promised $30 billion savings be from?

6 – Trade balance should not be looked at separately

Legal capital transfers and services imports should be included. These latter having fluctuated between $10 to 12 billion between 2010 and 2015, need to be accounted in so to have net capital outflows and therefore the balance of payments, including the deficit that may exceed $30 billion by end of 2016. For the IMF, $112 billion of reserves by end 2016 and possibly less than $92 billion by end of 2017 if the price of oil is maintained at around $50 a barrel, if and only if as expected, there are targeted budgetary rigour, fight against unproductive expenditures and increase in exportable volume, otherwise foreign reserves would close by end of 2017 at lower levels. In short, Algeria, having the potential to reach a diversified economy, would be best and subject to revise its current industrial and socio-economic policies. Because, not being utopian, the economy will still be and for a long-time tributary to the hydrocarbons exports. [Refer my interview with AFP on July 20th, 2016 on the state of the Republic in three phases, positive aspects, corrections to conduct and 19 proposals for recovery – (soon to be published)].

-Intervention of Professor Abderrahmane Mebtoul – international meeting organized by the international organization ‘The Alliance for Rebuilding Governance in Africa (ARGA)’ 26 to 30 January 2014 – Rabat, Morocco on the theme “Africa must reinvent its economy” in partnership with the Foundation Charles Léopold Mayer for the progress of humankind, the African Innovation and the French Foreign Affairs Ministry. Professor Abderrahmane Mebtoul is member of the Scientific Council of the Pan-African Organization of the United Nations, CAFRAD representing Algeria, as an independent expert appointed for his scientific work.